How will the City react to a Tory or Labour general election victory?
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Version 0 of 1. Major financial firms will have traders and analysts stationed at their desks by 10pm on Thursday, in time for the exit polls which will give first indication of the result of the snap general election. With the market positioned for a Conservative victory, any early sign that Theresa May’s party will loosen its grip on parliament will spark a market reaction. The pound will move first, as it trades round the clock in the 24-hour foreign exchange market. But shares and and government bonds will also be jolted as their markets open on Friday morning. Investors were surprised when May called the election on 18 April, with the FTSE 100 suffering its biggest fall since the vote for Brexit while sterling rallied, but most commentators expected the Tories would win convincingly, with some predicting a landslide. “A somewhat unimpressive campaign from the Conservatives, plus a better showing from [Labour leader] Jeremy Corbyn than had been expected, have combined to make this campaign more of a contest than was likely six weeks ago,” said analysts at financial firm IG. “Nonetheless it is clear that, barring a Brexit or Trump-style surprise, Theresa May will be returning to Downing Street at PM on Friday morning.” After a flurry of activity when the exit poll is published, there will be a lull until the first seats are called. Analysts will be looking at the size of the Conservative majority in parliament - it is currently 17 seats - to determine any market moves, while a hung parliament or Labour victory would cause a more dramatic reaction. how the pound might react to #UKElection2017 results pic.twitter.com/bvQDJqVHUq Increased Conservative majority As the markets are expecting the Conservatives to win, analysts at ING reckon the party’s majority would need to increase if the pound is to move sharply from its current level of just below $1.30. “We need to see a Conservative majority of at least 50 to get a significant move higher” in the pound, according to analysts at Dutch bank ING. A survey of economists by Bloomberg suggests sterling will rise to $1.3100 if the Conservatives achieve a large majority. Movement in the stock market is likely to be linked to sterling. Since the vote for Brexit, the FTSE 100 has been bolstered by the weaker pound as this benefits the international companies in the index. Analysts at JP Morgan, though, reckon the index could rise by as much as 2% despite stronger sterling on relief that the Conservatives have secured victory. The political ramifications for Brexit negotiations will also be scrutinised. Paul Hollingsworth, UK economist at Capital Economics, points to rumours of a cabinet reshuffle in the event of a strong victory for May. This could include Ben Gummer moving to the Brexit department. “Given that Gummer campaigned to ‘remain’, this might perhaps soften the government’s stance somewhat in negotiations,” said Hollingsworth. Reduced Conservative majority This could spark expectations that May will not survive as leader of the Conservative Party. Stefan Kreuzkamp, chief investment officer at Deutsche Asset Management, said: “Tory losses of the sort implied by some of the recent projections could fatally undermine the position of May as prime minister and party leader. Tory infighting could then easily result in a hard Brexit candidate taking over, increasing the risk of a Brexit with no alternative arrangement in place.” Kathleen Brooks, research director at financial firm City Index, agreed that a slim majority will “arouse fears of a hard Brexit”. “This could spook sterling traders,” she said, calculating the pound could fall towards $1.25 – the level it was trading at before the election was called. But others take a different view, calculating that a weakened Conservative party could soften Brexit as it would require more political compromise between the parties. The Bloomberg poll reflects these differences, showing a sterling rally – to $1.3025. A hung parliament “All hell could break loose metaphorically speaking, at least at first,” said Berenberg’s senior UK economist, Kallum Pickering. The Bloomberg poll puts sterling at $1.2350 in this scenario. Brooks points to a delay the Brexit negotiations, which she said could drive the pound to $1.20. “In this scenario we would expect a sharp drop in the pound and the FTSE 100. While we would expect the FTSE 100 to recover in the short term, we could see £/$ fall back towards 1.20,” she said. “Sterling has been the conduit through which traders have expressed concern over Brexit, thus we would expect the pound to suffer the most if there is no clear winner,” she said. Guy Foster, head of research at Brewin Dolphin, said the FTSE 100 could benefit as the international companies in the index will benefit from the pound’s weakness. Hollingsworth at Capital Economics reckons the index may not sustain its rally, though. “We are not convinced that equity prices would continue to rise, given the political uncertainty,” said Hollingsworth. A Labour victory In this scenario, Bloomberg’s poll predicts sterling would reach $1.2484. Brooks expects an initial decline in sterling and in UK share prices “on the back of investor fears about Jeremy Corbyn’s leftwing agenda”, but she reckons that in the longer term the markets should have little to fear. “Stock market gains under a Labour government aren’t unheard of ... under Tony Blair’s premiership, the FTSE 100 rallied nearly 50%,” she said. Pledges in the Labour manifesto that energy companies will be taken back into public ownership, the privatisation of Royal Mail will be reversed and a consultation will take place on breaking up Royal Bank of Scotland may rattle the stock market. Labour also wants to increase corporation tax to 26% in 2020 from 19%, which could also knock sentiment on the stock market. But currency experts at Dutch bank ING see some support for sterling. They said: “If a credible Labour-led coalition can be formed quickly, then we are likely to see markets price in greater odds of a softer Brexit deal and this could arguably help the pound recover from any initial sell-off. From the currency’s perspective, this channel is likely to outweigh any questions over Labour’s economic policies.” Hollingsworth reckons there would be a reaction in government bonds, known as gilts, because of expectations that Labour would loosen fiscal policy. Gilt yields – which move inversely to price – could rise from their low levels, according to analysts at JP Morgan. |